Accounting Capstone Project Sample

As at 30 June 2013, Envision Optics Pty Ltd had received lay-by payments from customers totalling ,860 (GST-exclusive) in relation to several frames and sunglasses.

As at 30 June 2013, these frames and sunglasses remained in the closing stock of Envision Optics Pty Ltd. Ashleigh posted the $2,860 to debit “cash at bank” and credit to “sales of frames and accessories”. The lay-bys are refundable, meaning that if the buyer does not pay the full amount owing under the lay-by transaction, Envision Optics Pty Ltd will refund the deposits paid to the customer. Do not make any adjustment to COGS or inventory.

On 4 January 2013, Envision Optics Pty Ltd entered into a non-cancellable lease agreement to finance the acquisition of a motor vehicle (ie. a 2,600 cc Honda Accord) that will be used exclusively in the business. Details of the finance lease agreement are as follows:

Monthly lease payments (GST-inclusive) due on the 4th day of each month = $780

Salvage value of the motor vehicle after the eighth year = $Nil

The first lease payment of $780 is made in advance on 4 January 2013. There is no interest on the first lease payment.

Thereafter, 71 monthly lease payments are due on the 4th day of each month. The 72nd and final lease payment is due on 4th December 2018.

Under the lease agreement on 4th December 2018 (being the same date as the final $780 lease payment, the company is also required to make the guaranteed lease residual payment of $10,000 (GST-inclusive). The company intend paying out the guaranteed lease residual in 6 years time and taking possession of the motor vehicle.

Useful/(effective) life of the car (same for accounting and taxation) 8 years

Depreciation policy: the company uses the straight line method for accounting purposes and the SBE simplified depreciation regime for small business entities for taxation purposes.

The residual value of the motor vehicle at the end of the eighth year $Nil

A total of six (6) lease repayments of $780 each (GST-inclusive) have been made between 4 January 2013 and 30 June 2013. Ashleigh has debited the 6 lease payments for their GST-exclusive amount of $4,254.55 to the “lease payments” account which is shown as an expense in the Profit and Loss Statement and credited “cash at bank” for this amount.

As the company is on the cash basis for GST, the company has claimed back the $70.91 GST input tax credits associated with each lease payment on the 4th day of each month in the company’s Business Activity Statement (BAS) for the relevant quarter. Ashleigh has correctly debited the GST of $425.45 associated with the 6 lease payments to the “GST receivable” account in the Balance Sheet.

On 12 June 2013 Envision Optics Pty Ltd imported designer frames from Hong Kong. This was the date that the goods left Hong Kong. The terms of shipment were FOB destination. The goods arrived at Andrew’s store on 26 June 2013, with the invoice attached. The goods were purchased in Hong Kong dollars at a cost of HKD 70,000 (inclusive of on-costs). The invoice states that goods must be paid for by 12 July 2013. At 12 June 2013, the foreign exchange rate was A$1.00 = HKD7.153 and Ashleigh has recorded the inventory purchase correctly at that spot rate. At 30 June 2013, the foreign exchange rate had moved to A$1.00 = HKD6.609. Andrew pays the invoice on 5 July 2013. On this date, the foreign exchange rate was A$1.00 = HKD7.052. The goods were not hedged.

The bookkeeper, Ashleigh, has not recorded any depreciation/amortisation in respect of any non-current assets acquired by the company during the 2013 financial year, as she was not sure what depreciation rates to use. She would like you to prepare an accounting depreciation schedule and to process the depreciation/amortisation journal entries for the 2013 financial year directly into MYOB (refer page 12 for detail of depreciation policies for both accounting and tax purposes).

Ashleigh coded all of these purchases to their various asset category accounts in the Balance Sheet. No other non-current assets were purchased during the year.

On 31 July 2012, Envision Optics Pty Ltd held an opening party at the store for potential new clients, optical suppliers and local business people. The party consisted of food and drinks (both alcoholic and non-alcoholic). A total of 40 guests attended the opening party. No employees attended the opening party. The occasion was purely social. The cost of the opening party came to $2,500. This amount was coded to “opening party” in the Profit and Loss Statement.
For FBT purposes, the company adopts the 50/50 split method in relation to valuing meal entertainment fringe benefits. The relevant FBT tax paid in respect of employees has been paid by the company and is included in the “fringe benefits tax paid” amount in the Profit and Loss Statement.

In your discussions with Andrew, he advises that in mid-December 2012, he took a pair of Prada sunglasses from the business and gave it to his brother, Graham as a Christmas present. The Prada sunglasses cost the business $105. They were being advertised for sale within the store for $285.

Ashleigh, the bookkeeper, recorded this transaction in MYOB by debiting the expense account “stock taken for personal use” and crediting the “inventory” account for $105, being the cost of the sunglasses. No sale was recorded in the system as Andrew did not pay any money to buy the sunglasses.

Andrew and the staff undertook a stocktake on the morning of 30 June 2013. Closing stock has been reliably ascertained at $62,740 (GST-exclusive). This amount reconciles with the computer system. This amount is shown as “inventory” in the Balance Sheet at 30 June 2013. The company adopts a perpetual inventory system and uses the FIFO (first-in, first-out) inventory valuation method. The opening balance of inventory on the first day of business (ie. 1 August 2012) was $52,000.

Envision Optics Pty Ltd extends credit to selected customers. For those customers that have been approved, the company has trade credit terms of net 30 days. The company rigorously pursues any bad debts owing by customers. The company uses the “provisioning” method in accounting for their bad/doubtful debts, not the “direct write-off” method. Ashleigh has already recorded the provision entry by debiting “bad debts expense” and crediting “provision for doubtful debts” for $1,828.

During the 2013 financial year, several debts were written off. These were small debtors who were invoiced but were unable to pay their debts after several months of being chased to pay their outstanding amounts. In the end, Andrew instructed Ashleigh to write these debts off in the management accounts.

During the 2013 financial year, Ashleigh wrote off $935 in bad debts by debiting “provision for doubtful debts” and crediting “accounts receivable”. Hence, the balance of the “provision for doubtful debts” account at 30 June 2013 was $893.

At your year-end meeting with Andrew, he presents you with a letter and attached
The employees of Envision Optics Pty Ltd are as follows:

Andrew Blake (Director and full-time optometrist);

Miranda Blake (Director);

Holly Partridge (full-time optical dispenser); and

Danielle Rafter (full-time retail assistant).

The total salaries and wages for Directors and employees are shown in the Profit and Loss Statement. There are no outstanding (accrued) wages owing to any of the employees at 30 June 2013.

In addition, Stuart Fagan is engaged as a locum (i.e. a contractor). Stuart works every Saturday morning at the store testing eyes. Stuart is paid as a contractor and receives $65 per hour (GST-exclusive). Stuart does not accrue any leave entitlements, nor is any superannuation provided on behalf of Stuart.

Each fortnight, Stuart supplies Envision Optics Pty Ltd with a valid tax invoice quoting his ABN. Stuart was paid a total of $14,150 (GST-exclusive) during the 2013 financial year. This amount has been expensed to the Profit and Loss Statement under the account entitled “Locum fees”.

Each full-time employee is entitled to four (4) weeks paid annual leave. Part-time staff are entitled to pro-rata annual leave. At 30 June 2013, Ashleigh had not yet recorded a journal entry to accrue the annual leave for these employees. Based on the projected salaries of when each employee is expected to take their annual leave, the total provision for annual leave (in respect of all employees) totals $10,360. The company policy is that all annual leave must be taken within 12 months. No annual leave was taken by any employee during the 2013 financial year.

No sick leave was taken by employees during the 2013 financial year. No provision for sick leave should be made in the 2013 accounts as no employee is considered likely to take more than their allocated sick leave entitlements. The sick leave is non-accumulating and non-vesting meaning that no entitlement (and therefore, no accrued sick leave) is carried over to the following financial year for any employee.

Similarly, no employee is eligible for long service leave. No provision for long service leave should be made in the 2013 accounts as, at 30 June 2013, it is not considered probable that any employee will reach the 10-year employment target with the company in order to qualify for long service leave. Due to surplus cash, on 1 June 2013, Envision Optics Pty Ltd prepaid 3 months of insurance totalling $900.

Andrew was delighted that there was surplus cash in the businesses Bank of Australia’s cheque account. On 3 June 2013, he invested $105,000 of this money into a 90-day term deposit with the Bank of Australia at an interest rate of 4.15% per annum. Interest will be paid by the bank on maturity 90 days later (ie. 31 August 2013). The company does not intend to rollover the term deposit once it matures. Ashleigh recorded this in the “term deposit” account in the Balance Sheet.

On 20 May 2013, Envision Optics Pty Ltd purchased 1,600 shares in BHP Billiton Ltd at a cost of $35.20 per share (including brokerage). These shares were purchased with the view to holding them for the long-term. No dividends were paid by BHP Billiton Ltd between acquisition date and 30 June 2013.

Ashleigh recorded the shares in the company’s Balance Sheet at their cost of $56,320. No other shares were bought or sold during the 2013 financial year. As at 30 June 2013, the share price of BHP Billiton Ltd was trading on the ASX at $31.00 per share. Andrew and Miranda anticipate that capital gains will occur in the future as should they sell their business in the distant future, they will generate significant capital gains (in the form of goodwill).

Andrew was delighted with the fact that the company made a small accounting net profit in respect of the year ended 30 June 2013. So much so, that on 7 July 2013, Andrew and Miranda declared and paid a fully franked cash dividend of $4,000 based on the 30 June 2013 profits.

The company’s Christmas party was held on Friday 7 December 2012 at a nearby licensed seafood restaurant. Andrew and Miranda, the company’s employees and their partners attended the Christmas party. No customers were invited. The cost of the Christmas party came to $1,260. This amount was coded to “Entertainment – Employees” in the Profit and Loss Statement.

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